Last resort for burned investors

More turning to arbitration for some relief

Steve De Villo was in his shoe store in Brooklyn reading the New York Post last year when a small ad caught his eye:

"If You Lost $$$ in the Stock Market ... YOU MAY BE A VICTIM OF Fraud, Misrepresentation, Unsuitable Trades, Churning or `Conflicts of Interest!"'

The ad incorporated a pair of scales, an exhortation to "Let us help you recover your significant losses," and a phone number for someone calling himself "The Investor's Lawyer."

"Everything he described was what happened to me," De Villo says.

Significant losses? The IRAs into which he'd stashed $2,000 or so annually, year after year, had reached $192,000 in value and then tumbled to about $50,000. Instead of being able to retire--he'd just turned 64--he'd have to keep working indefinitely in his little Stride-Rite children's shoe store in Bensonhurst.

He blamed Merrill Lynch and his broker there, who'd steered him from lower-risk government bonds into skyrocketing tech and telecom stocks, and subsequently, De Villo says, dismissed his fears and doubts until it was too late.

"Everything I did right for 20 years, he burned up in two or three," De Villo says. He was beyond angry.

So he called "The Investor's Lawyer," Sheldon Gopstein, who this month filed Stephen and Norma De Villo's arbitration claim, seeking $106,405.81 in compensatory damages. His clients, Gopstein says, are "an all-too-common example of conservative individuals of modest means who fell prey to unscrupulous, reckless brokers."

Investors have lots of lawyers these days. They advertise on radio, giving toll-free numbers. They're all over the news media as they bring claims against tarnished banks and brokerages and their once-celebrated stock analysts.

"We're cleaning up the tech wreck with these cases," proclaims Jacob Zamansky, who's brought several of the most prominent claims. "It's going to be a war of attrition for the next five years between brokerage firms and their customers."

Newcomers are swelling the ranks of the small Public Investors Arbitration Bar Association, which had 165 members five years ago and now has nearly 600.

"We operated quietly for years in our own little niche," says its president, Atlanta attorney Pat Sadler. "There weren't that many attorneys involved, on either side."

Now, the rush is on. Lawyers who've handled arbitration claims are getting very busy. Lawyers who never have are joining the fray.

Three years of free-falling stock prices underlie this boomlet, of course.

"If the market had continued to go up, I don't think we would see as many claims," says Linda Fienberg of NASD, the securities industry association that handles 90 percent of arbitration cases.

The number of NASD claims climbed almost 40 percent over the past two years, hitting 7,704 in 2002. There could easily be 10,000 this year.

But the flurry has also been fed by headlines about cooked books, insider trading and allegations that some of the nation's most prominent brokerages were riddled with conflicts of interest.

With multiple investigations under way and new allegations emerging regularly, lawyers could tell investors that they might be not merely unlucky, but defrauded--and that there were ways they might get some of their money back. And the investors were infuriated enough to try.

When De Villo met with Gopstein, he was unpleasantly surprised to learn that he had no right to sue his broker. Since a 1987 Supreme Court decision ruled it enforceable, virtually every brokerage agreement contains a clause in which the customer agrees to submit any dispute to binding arbitration.

Most don't read paperwork

Most investors don't bother to read the agreement, says Gopstein. "They just sign the form and find out later that they can't go to court."

Arbitration claims, heard by a panel of three arbitrators, are somewhat like courtroom trials--lawyers go through discovery, present witnesses and evidence, make arguments--but also unlike them--they're closed to the public; the rules of evidence differ; there's no jury and no appeal.

Lots of investors seek lawyers to represent them in this process, though individuals can file claims on their own. Often they get turned down. Sometimes their cases, however heartbreaking, are too small to be financially worthwhile. Many attorneys won't take a client who lost less than $50,000.

If a broker didn't break any laws or rules, customers "don't have cases, they just have losses," one attorney says.

But the De Villos did have a case, Gopstein decided. The complaint he filed charges that Merrill Lynch and one of its brokers violated the NASD's "suitability" doctrine, which requires brokers to tailor investments to an individual client's finances, risk tolerance and goals.

Merrill Lynch is getting testy about such accusations.

"The fact that people lost money doesn't mean that their financial advisers did anything wrong," says spokesman Bill Halldin. "The aggressive recruitment of clients seems to be increasing the number of claims that have no merit."